U.S. Property Tax Association, Inc.


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Fighting For The Underdogs In Commercial Property Tax Appeals

Trickle Down Taxes: How Unfair Tax Burdens are Passed Along

On Behalf of | Aug 3, 2018 | Firm News, Posted in Commercial Property Taxes, North Dakota Property Taxes, Rental Property Taxes.

The second of a 4-part series by Matt Barnsley

Tax levies do not exist in a vacuum. They are multifaceted and complex. And in a representative democracy like ours here in the United States, it is vital that all properties be assessed and taxed fairly. This may seem like an obvious point to contend. However, to many local and county tax assessors it is not reality. This can be the impact of many different situations. Let’s take a look at a hypothetical situation, based on a real one, and see how unfair tax burdens can have impacts on many different people.

In our last post, we discussed how a sudden economic boom for a community can have both positive and negative impacts. As the tax base grows, cities must account for the growing population with infrastructure projects like roads and sewers. But when the boom goes bust towns can be faced with some pretty serious financial decisions. In our hypothetical situation, the city’s property assessors were placing an unfair burden on commercial property owners, specifically rental properties. This was for a number of reasons but ultimately because it was the easier choice for bureaucrats to enact. Let’s take a look at some potential problems that could arise if this prejudicial practice is not corrected.

As the renters leave town, more units become available. And with fewer apartment seekers to begin with, the market gets flooded. Suddenly (and seemingly overnight) apartments that could reliably rent for $1500/month are barely making half that. The property owners see their revenues plummet. An apartment complex that was bringing in a million dollars a year in revenue is cut in half. And unless the local assessors take that change into account, the property owner gets screwed. Royally. Depending on the method used by the assessors (cost vs income based), the value of the property could vary wildly and end up being severely overvalued, sometimes as much as 60% in some cases.

Property owners aren’t greedy or evil people. They know how important their tax dollars are to local communities. They probably send their kids to the very same schools their tax money helped build, just like everyone else. They shouldn’t be charged with carrying an unfair burden simply because there’s less of them and it’s politically convenient to do so. Even if they wanted to pay the discriminating assessments on the properties, they likely couldn’t.

As we said at the beginning of this piece, taxes don’t exist in a vacuum. There is only so much money to go around. And if a property owner is forced to pay a tax rate that their income does not support, hard choices will have to be made. In some cases, that means cutting back on vital maintenance issues at the properties, meaning lowered standards of living for the renters (which also might include many businesses that do not own the buildings they occupy. Don’t forget, this isn’t just about residential properties). It might mean raising rates on renters without any benefit to them, forcing renters to leave town at even greater numbers. In some extreme cases, the owners might be forced to walk away from their property entirely, leaving the bank with an overvalued property, unable to offload it in a depressed market. That’s not good for anyone. Robbing Peter to pay Paul to rob Luke isn’t a long-term solution. It’s exactly how real estate markets crash. And it begins with unfair, burdensome assessments.

Instead, towns should adjust their valuations, every year, by doing randomized spot checks of property values and adjust the ones that need adjustment. In many towns, this is already a practice set in place by law. Unfortunately, many towns don’t regularly practice this, due to political motivations and an unwillingness to be the bearer of unwelcome news. Which is a shame because a lot of these issues could be dealt with before they get out of hand.